Taking IT reorgs to the extreme

Get ready for the disappearing IT department. Companies including Zappos, GameStop, Aetna and AccuWeather have restructured IT, sometimes radically, to respond to some harsh economic and technologic forces bearing down on CIOs.

Zappos, which has been called "one of the most blissed-out businesses in America," is exploding its entire hierarchy to replace it with what might be the equivalent of a corporate commune. The company spent 2014 reinventing itself as a holacracy, embracing an organizing principle akin to democracy--including a 31-page constitution.

Spontaneity and distributed power are hallmarks of holacracy, where people work in groups, or circles, according to their enthusiasms. The circles are rearranged as new projects emerge or colleagues choose to pursue something else. Employees take suggestions, not orders. Decision-making is pushed down, often to the lowest rungs (if there were rungs). Former managers become "lead links" who offer coaching but don't approve or reject ideas.

"It's a radical approach, and we're passionate about trying it," says Brent Cromley, CTO at Zappos. "We want everyone thinking about how we can improve things, not just a select few at a time or a group set aside to do innovation."

Traditional org charts show lines and boxes, but a holacracy has clots of circles meant to merge and divide like amoeba under a microscope.

Not every revamp goes to the Zappos extreme but some CIOs are feeling pressure to change the IT group amid new business realities. Marketing chiefs and other non-IT executives now encroach, or want to encroach, on technology decisions. Tech is changing faster than ever, while financial slumps and internal bureaucracy can inhibit quick response. And customers won't wait. Walt Disney Parks and Resorts reorganized its global IT operation in October, aiming to double the share of technologists working on innovation from 30 percent to more than 60 percent. General Electric has formed agile and sometimes self-governing teams. Other CIOs have abolished IT groups focused on technologies, such as email or the data center, and have reorganized to target business goals, such as customer acquisition or globalization, says Andrew Horne, a managing director at the Corporate Executive Board.

Companies are struggling to transform into digital versions of themselves, often with no clear idea of what they will look like at the end. The IT group, Horne says, must be ready for anything.

"We see companies trying to create a structure that is flexible enough to be able to succeed regardless of the type of demand for technology, the type of economy or the direction the company goes," he says.

Done well, a dramatic overhaul can make IT responsive to the unknown. Done poorly, you fertilize staff resentment about too much change or dead-end jobs on legacy systems. There are no best practices for the bleeding edge. Just a few intrepid CIOs.

Born to Change

As soon as corporate IT was born six decades ago, someone no doubt wanted to change it. We've seen the pendulum swing from centralized to decentralized and back. Invisible backroom mechanics became service providers, who became business partners.

What's different today is the degree of uncertainty about what the IT group is if virtually all companies are now built, top to bottom, on technology. CIOs themselves are divided about their own futures. In our 2015 State of the CIO survey, 49 percent of 558 IT leaders said they're destined to become managers of contractors and cloud vendors--hardly strategic. Indeed, sometimes old ideas and established leaders don't cut it. RSA Insurance Group in London cleaned house last year, replacing several senior executives, including all IT leaders and the CIO.

RSA also created the position of chief digital officer as it tries to move to "more disciplined and effective use of technology."

At Aetna, a move to explore ways of generating new revenue led the health insurer spin out a new business unit from IT in 2011. The unit, rebranded as Healthagen in 2013, includes technology and health companies Aetna had acquired, and it offers new services based on data analytics. Hospitals, physicians and employers buy software and data products from Healthagen, essentially making it a vendor, says Brian Garcia, CTO of the unit. It could offer an alternative career path for Aetna's IT professionals--Garcia used to be Aetna's chief architect for software.

Race for Creativity

Innovation--the desire to nurture it, the fear of it fizzling--is a prime driver of big IT reorganizations. But finding the best IT structure for promoting innovation is a problem that continues to vex CIOs. Seventy-four percent of the respondents to our State of the CIO survey said it's challenging to find the right balance between business innovation and operational excellence.

The dramatic restructuring at Zappos is intended to re­ignite innovation, says CTO Cromley. The online retailer, which started with shoes and now sells all kinds of clothing and accessories as part of Amazon.com, has never been a typical company. Employees are known as Zapponians, and they live to wow customers. In fact, the company's No. 1 core value is to "deliver wow through service." Passion and "a positive team and family spirit" are also key values promoted with frequent off-site meetings, occasional costume parties and intense "culture" training. CEO Tony Hsieh contends that happy, engaged employees are naturally creative, and creativity engenders customer satisfaction and loyalty.

As Zappos grew, however, Hsieh and fellow leaders worried that the company would lose its edge. They are counting on the new holacracy to wipe out any creeping complacency.

To remind Zapponians just how different they are expected to work now, the company renamed its traditional departments. Marketing is now Life Cycle. The core retail business is Flywheel Operations. IT is Unicorn, after Hsieh's favorite creature. As Cromley explains, "We stayed away from tech or IT because they put you in the mindset of legacy organizational structures."

And losing legacy thinking is critical to making the new plan work.

Most of Unicorn's 350 staff members are organized into work circles, such as Zappos Labs for performing untraditional retailing experiments and SuperCloud for the extensive implementation of Amazon's cloud computing services. At least 50 circles exist within Unicorn, but the number isn't permanent: Reorganizations occur weekly, as projects shift, roles change and power is redistributed. The goal is to keep cross-pollinated thinking in play. "We want people to know [that] nothing's stopping you," Cromley says.

Holacracy isn't easy to get used to. Anyone can propose a change. Everyone can see what changes are happening in any circle.

Initially, Zappos hired an outside consulting company to teach holacracy principles in a four-day program. Zappos soon assumed responsibility for training, cutting the session to three days and offering employees ongoing, targeted classes and webinars.

When Unicorn members fall into old patterns, perhaps asking Cromley to approve an idea, he reminds them that he's there to guide, not dictate. "Some people are afraid of owning decisions or giving up control," he says.

Knowing whether holacracy is working isn't easy either. Cromley says he'll recognize it when he sees big innovations enacted without knowing they were even in the works. "We've seen glimpses of that but haven't seen the breakthrough yet," he says.

For example, there have been some promising user-experience experiments from a circle that spontaneously emerged to create a consistent Zappos digital experience across all customer contact points, including fulfillment, shipping, Web, email and marketing. "This is a self-organized group passionate about solving this problem," he says.

Split Personality

If holacracy sounds unruly, there are other ways for CIOs to make dramatic changes in IT mindset and performance.)GameStop, a $9 billion gaming retailer, last year split IT into four groups: Delivery, which includes application development and support services; Architecture, responsible for orchestrating cloud providers, among other tasks; Enterprise Strategy, which figures out how to implement major new technologies; and GameStop Technology Institute (GTI), which is focused on customer experience and product innovation.

GameStop split IT into four groups, says Jeff Donaldson, the company's former CIO and now head of one of those groups: GameStop Technology Institute.

After studying the many roles a modern CIO is expected to assume, GameStop decided that carving IT into defined portions and installing a leader for each would be a more effective approach, says Jeff Donaldson, senior vice president of GTI and the company's former CIO. "We came to the conclusion that it's really ridiculous to expect that one professional can operate effectively across all of those personas," he says.

GTI works with IBM, Texas A&M University and 24 other outside organizations. These partners help GameStop assess the economy, emerging technologies, customer behaviors and other criteria for weak signals about coming change.

Donaldson declines to name his other external partners, but says they cover important territory too wide for any one IT leader to tackle. There's a partner to delve into changing notions about privacy. A partner to look for nascent shifts in customer expectations, and one for exploring augmented reality. The list goes on, including a partner to help interpret all the incoming information from other partners. Getting help like this means "you're not spreading the peanut butter too thin," he says.

The goal of the reorganization is to keep GameStop on top. Its main business is selling new and used, physical and digital video games for Xbox, PlayStation and Wii consoles. GameStop lists key competitors as Wal-Mart, Target and Amazon--not exactly a retiring bunch.

But they all face digital demons as gaming goes online at a fast clip. Knowing that people shop tethered to their smartphones, GameStop, through GTI, is working on integrating new technology, such as interactive marketing using beacons, in its stores. Donaldson wants to meld the online and in-person experience.

All of GameStop's C-level executives were involved in hatching the plan to split IT and all have been involved in educating employees about it. One early obstacle was convincing the rest of the company that four separate IT groups could work well together, he says.

"People want to know what the processes are, but some of those will be invented during the change and tweaked along the way," he says. "People have to be willing to go down that path with you."

GameStop rented a local movie theater for the initial discussion with employees. The CEO was there, and that made a difference. "If he stands in front of us and says, 'This is something important to me and for our future,' then 85 percent to 90 percent of the organization will immediately support the change," Donaldson says.

Even a year later, GameStop isn't done figuring out its future. Stores in Austin, Texas, are testing beacons and other interactive customer services. The company plans to bring the same technologies to three more markets later this year.

Everyone has to be able to work with ambiguity. "You're doing something new, and there's not a lot of prior art to look at," Donaldson says.

Relentless March

AccuWeather has spent the past few years reworking its structure, bit by bit. In 2012, the company spun out an innovation group of engineers, mainly from IT, to do advanced research for customers, especially in predicting severe weather and improving forecast accuracy. In 2013, it reordered its executive ranks, formalizing digital work that was already going on. CIO Steve Smith became chief digital officer, working with a new chief strategy officer who had been in charge of digital media.

Last year, IT got a makeover. The company took the two branches of IT--development and operations--and split each one into daily work and strategic work. New directors of strategy for each branch make technology plans for one, two and three years out, says Chris Patti, vice president of technology.

A relentless march to digital business has also influenced IT changes, and AccuWeather looks to technology companies like Google and Yahoo as models, Patti says. After all, major sources of revenue for AccuWeather are advertising sales at its Web properties, as well as mobile applications and its API business. And, like Google and Yahoo, "we produce tech to empower people," he says.

Meanwhile, AccuWeather has moved some functions that were historically part of sales and other business groups into IT. The company has always sold weather information, starting with forecasts in print and on video. Now the products are mainly data files and application programming interfaces (API) for digital services that customers can build on the fly.

The sales team had been managing these offerings. But as the products grew increasingly technical, sales would often have to email IT engineers with customers' questions. Then the norm became having IT staffers join customer calls to explain product details.

Last year, to field these calls, the company created the role of technical account manager and filled the jobs with technology leaders. "It's more appropriate to put them in IT," Patti says.

He advises fellow technology leaders to accept that today's IT group must work in multiple ways--as developers, consultants and facilitators. Sometimes you'll build a mobile app to realize a business goal. Other times you'll consult with the marketing department as it buys its own technology. You might help HR negotiate a contract with a vendor. As technologists at AccuWeather delved into different roles, they received training in soft skills such as listening and phone etiquette.

Avoiding Trouble

With big change comes the potential for big problems. Approach is everything, says Horne at the Corporate Executive Board. While the CIO might absorb the new world order, staffers can easily revert to safe old ways. This underlines the dangerous perception that IT is bureaucratic and undermines the new image IT is trying to project. "IT often runs to make organizational changes and [everyone is] underwhelmed by results because they have the same people and often the same processes," Horne says.

One advantage GameStop has is a built-in culture of lateral communication, Donaldson says. There may be titles and hierarchy but discussion and decision-making cross those boundaries. "You need that," he adds.

Even at Zappos, where processes very definitely changed for everyone, Cromley finds that he must remind himself to break a habit of making decisions for others. "Yesterday, someone came to me to sign off on something. I had to say, 'I can give you my advice but this is your responsibility to decide,'" he says. "That's one thing that's hard for me to give up."

When rearranging IT, don't make the mistake of dividing the group into modern and legacy systems, Horne says. It's tough to make the backwater sound interesting, and people stuck there grow resentful if they feel they're not working on anything innovative. "One company called it the 'heritage' IT team. Didn't last very long," he says.

To avoid that, CIOs should consider matching the IT staff to business activities. Working on customer acquisition, for example, could include a mix of old and new technologies, which is more satisfying for more people, Horne says.

IT might organize around 20 or 30 such activities, setting funding and speed at a different level for each one. First, decide where IT must excel and where it's OK to dare to be mediocre. For example, if staying ahead of customer habits provides competitive advantage, concentrate on analytics and let human resources applications simply be serviceable, he advises.

Finally, beware of too much change, Horne says. The average employee experiences a significant change, such as a reorganization or the arrival of a new boss, every seven months, according to CEB research. But it can take two years for someone to absorb the change and return to full productivity. "You have to be careful about how much change any one part of the organization is going through," Horne says.

GameStop's IT restructuring has altered Donaldson as a leader. Collaborating with futurists, researchers and venture capitalists has jump-started his curiosity about problem-solving and his interest in shaping the company's future. "This lights up neurons," he says. "There's nothing better than that."

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